Power Systems Power Through Server Downturn

June 4, 2012
Timothy Prickett Morgan

There were two bright spots in the server racket in the first quarter of this year, according to market researcher Gartner, and one of them was IBM‘s Power Systems iron. The other, of course, was the cohort of X86 server makers, who are gnawing at the flesh of Unix and proprietary server makers while the Unix vendors are busy taking pieces out of one another’s hides. The economy is still jittery in a number of parts of the world, and the server biz is losing a bit of its oomph.

But don’t get the wrong idea. There’s a lot of ancient and decrepit iron out there, and no matter how much companies want to white-knuckle their cash, eventually they have to break down and let go or they will end up with critical systems that break down and cause serious problems in the business. Eventually, they have to add applications and processing, memory, and I/O capacity.

In the quarter ended in March, Gartner says that the world’s server buyers consumed 2.35 million servers, which is a perfectly normal amount of machinery, and that this iron generated $12.44 billion in revenues for the dozens of tier one and tier two server makers as well as myriad whitebox vendors. That was an increase of 1.5 percent in terms of units, but a decline of 1.8 percent in terms of units.

There are a number of factors at work here. First, hyperscale data centers buy servers in tens of thousands of units at a time, and this business is very choppy quarter to quarter and is also an increasingly large portion of the overall server market as we all start using online applications from our PCs, smartphones, and tablets. IBM is also at the tail-end of a System z mainframe cycle, as is Unisys. Oracle is trying to knock the Sun Microsystems server business into the shape of a foundation for application stacks while at the same time undercutting Hewlett-Packard‘s HP-UX-on-Itanium server business by pulling support for future database, middleware, and application software on future Itanium chips from Intel. HP and Oracle are under pressure from IBM in the Unix racket, too, which is generating about $1 billion a year in takeout deals removing Sparc and Itanium iron.

While Gartner does not break out sales of Power Systems running the IBM i operating system, the fact remains that a healthy Power Systems product gives IBM one less reason to think about doing to the IBM i base what Oracle is doing to the HP-UX base. While the overall Unix server market was down 15.2 percent to $2.21 billion in the first quarter, IBM’s Power Systems business rose by 4.3 percent, to $1.24 billion. Oracle, by contrast, took a 25.7 percent revenue hit, falling to $453.8 million, and HP, which has seen server sales chill because of the Oracle software issue on future Itaniums, fell 40.2 percent to $382.1 million. Interestingly, Hitachi, which resells IBM’s Power Systems iron under its own SR16000 brand in Japan, had a nearly factor of ten jump in Unix system sales, to $45.3 million, and it is very likely that most (if not all) of this was due to some Power7-based server deals in the HPC space.

It is tough to remember sometimes how far the Unix market has fallen and how much more IBM is in command of it than either HP or Sun, which were fighting tooth-and-nail for dominance a decade ago and Big Blue was an also-ran with Power4 aspirations. Just for fun, I hunted around my hard drive for the first quarter Unix data from the first quarter of 2001, when Sun was still flying high. Sun posted $2.09 billion in Unix system sales, compared to HP’s $1.15 billion and IBM’s $1.02 billion. IBM was still the top server seller in Q1 2001, with $3.21 billion in sales, and HP and Compaq separately had $1.53 billion and $1.67 billion in revenues. This was before the HP-Compaq merger was closed and when both Sun and HP, thanks to the merger, were about to knock IBM flat on its systems back. Or so it looked at the time.

Fast forward 11 years, and Sun has disappeared inside of Oracle after both IBM and HP considered buying the company, and HP is the undisputed leader in X86 servers (thanks to acquiring Compaq) and is neck-and-neck with IBM for the systems revenue crown. And switch maker and server upstart Cisco Systems is not just giving all the tier one server makers headaches, but is forcing them to become networking companies in their own right and react to the success of its “California” Unified Computing System modular servers. (Cisco calls them blades, but they are really not blades, and more than the new PureSystems and their Flex System chassis and server nodes are.)

In the first quarter, IBM was the top server seller, with $3.49 billion in revenues, a decline of 7.2 percent compared to the year-ago period and just edging out HP, which had $3.46 billion in sales and which fell by 9.7 percent. IBM’s System x and BladeCenter business helped push up sales as did its Power Systems line, but mainframes are at the tail end of their current product cycle and IBM is mostly selling capacity upgrades and not new systems. (This is more profitable mainframe revenue, so remember that.) Even Dell, which only sells X86-based iron, had a little trouble in Q1, with sales off 1.9 percent to $1.86 billion.

Oracle’s overall sales, including its X86 server business, were off 7.4 percent to $739.8 million, according to Gartner. And just so you can see how well Oracle’s Exadata, Exalogic, and Exalytic configured systems are doing, Oracle’s X86 server business is up 52.3 percent to $286 million. Oracle may not want to be in the generic X86 rack, tower, or blade server businesses, but it certainly wants to sell converged stacks of its software running atop flashy and heavily tuned X86 gear with its own label on it.

Cisco Systems continues to be the Cinderella story, with revenues of its rack and modular servers up a combined 72.4 percent to $335 million in the quarter. That makes Cisco the number six server maker in the world ranked by revenue, and with Fujitsu only growing 4.5 percent to $618.8 million in Q1 2012, it might only take 18 to 24 months for Cisco to catch and pass the Japanese server giant if current trends persist.

The X86 server business overall did pretty well, despite some slowness caused by Intel’s gradual rollout of “Sandy Bridge” Xeon E5 and “Ivy Bridge” Xeon E3 server processors in March and April–and behind their expected delivery last fall (for the E5s) and in March (for the E3s). Across all vendors, X86 iron accounted for just under 2.3 million units and drove $8.95 billion in revenues. That so few remaining machines–we’re talking 47,975 boxes that don’t use an X86 chip–could drive $3.4 billion in revenues is really still quite astounding. A lot of that money was IBM mainframes, which declined along with the Unix market and proprietary systems from HP and probably a few others.

Server sales were choppy during the quarter, according to Jeffery Hewitt, the Gartner research vice president who counts the boxes and the money. All of the major geographies showed server shipment growth except Western Europe, which was brought down by the eurozone financial crisis that has been dragging on like a world war. (Well, a continental one, at least.) Shipments in Western Europe were off 6.4 percent, which is pretty dramatic, while rising 16 percent in Eastern Europe and by 10.6 percent in Japan. That Eastern European growth is real, while that in Japan is just the rebounding of the market to something resembling normalcy after last year’s earthquake and tsunami in March. Hewitt told me that server shipments were up 3 percent in the United States, but revenues only rose by two-tenths of a point.

Blade server shipments were down 1.3 percent but revenues rose by 5.6 percent as companies bought fatter and more expensive blades; rack servers had only a four-tenths of a point growth in shipments, and revenues dropped by 5.3 percent, and you can blame the hyperscale data centers making up the cloud for bringing down the class average for server selling prices. Those big server deals are tough–if not impossible–to make money on, and that means server makers have to look elsewhere to make their margins.